The shares of Compagnie de Saint-Gobain (EPA: SGO) are up 8.1% over the last three months. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play. in the recent price movement. In this article, we have decided to focus on the ROE of Compagnie de Saint-Gobain.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In simpler terms, it measures a company’s profitability relative to equity.
Discover our latest analysis for Compagnie de Saint-Gobain
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, on the basis of the above formula, the ROE of Compagnie de Saint-Gobain is:
12% = € 2.3 billion ÷ € 19 billion (based on the last twelve months up to June 2021).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for 1 € of investment by its shareholder, the company generates a profit of 0.12 €.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of the earnings growth and 12% ROE of Compagnie de Saint-Gobain
At first glance, Compagnie de Saint-Gobain seems to have a decent ROE. Especially compared to the industry average of 8.9%, the company’s ROE looks pretty impressive. For this reason, the 6.5% drop in Compagnie de Saint-Gobain’s net income over five years raises the question of why the high ROE did not translate into profit growth. Based on this, we believe that there might be other reasons that have not been discussed so far in this article that may be hampering the growth of the business. These include low profit retention or poor capital allocation.
Then, by comparing with the growth of the industry’s net profit, we found that the profits of Compagnie de Saint-Gobain seem to contract at a rate similar to that of the industry which contracted at a rate of 6.5% over the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. What is SGO worth today? The intrinsic value infographic in our free research report helps to visualize whether SGO is currently poorly valued by the market.
Is Compagnie de Saint-Gobain making effective use of its retained earnings?
The decline in Compagnie de Saint-Gobain’s profits is not surprising given the way the company devotes most of its profits to paying dividends, judging by its three-year median payout rate of 59% (or a retention rate of 41%). With only a little money reinvested in the business, earnings growth would obviously be little or no. To find out about the 2 risks that we have identified for Compagnie de Saint-Gobain, visit our risk dashboard free of charge.
In addition, Compagnie de Saint-Gobain has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings. Our latest analyst data shows the company’s future payout ratio is expected to drop to 39% over the next three years. However, the company’s ROE is not expected to change much despite the expected lower payout ratio.
Overall, we believe that Compagnie de Saint-Gobain has strengths. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays the rest as dividends. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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